tv [untitled] November 2, 2011 3:00pm-3:30pm PDT
the conclusion of the story was that everyone did eventually get paid. however, at the time, the county was running basically a significant part of its budget off of a derivative scheme, or they were investing in very dangerous investments that were working to generate a lot of revenues -- risky investments. all well and good except that none of it was disclosed. so really, that is what got them in trouble. i mean, the investments themselves did not help because they crashed. all those investments started to go south. but what they got in trouble with with the sec was not disclosing that they had these investment schemes and that the budgets were relying on revenues from these investments.
the report that was produced really started the current trend of focusing on the issuer's responsibility for the official statement, the board pose irresponsibility. the sec took a pretty hard line on the responsibility of the board, and the public officials, to have done a better job. the standard, basically, was a recklessness standard for liability which was -- well, let's go back for a second. it is a two-step standard. do you know information that is either not in the disclosure or is not accurately provided or described? the story.
-- sorry. and then, was the disclosure authorized in a way that was reckless with respect to that information? in orange county, it is in a sense of the facts or bad facts, however you look at it. that there was this giant scheme that was risky that never got disclosed, said the sec decided that the board and all the relevant officials had to have known about the. certainly the treasurer and assistant treasurer did, and they were carrying it out, but others, and had the knowledge and acted recklessly in not making sure that got into the disclosure documents. it is somewhat of an extreme case as far as the facts go, but it set forward sort of the
contemporary version of what the standards are and how they would apply to you. ok, i think we did that. so -- no, that is fine. sorry. in the report, they did take the position that the board should become familiar with the disclosure documents, question the officials that are responsible, employees, and basically create -- take steps to ensure disclosure. ok. so the next bad case study, so to speak, is a san diego, and mark is particularly an expert on that.
he was brought in to help clean up that mess, as were we. but sort of happen again. it was a little bit different from orange county. it did not eventually lead to a bankruptcy, but it was similar in the sense that there was an elephant in the room that investors were not told about. in this case, the pension issues with san diego. the big pension liabilities that were growing because of benefits and underfunding and so on. and really inadequate disclosure. so this went on for a couple of years without anyone fixing it.
it went through the rating agencies and in continuing disclosure filings, so it permeated everything they did. it certainly appeared to be a pattern. the fcc concluded again that that recklessness standard has been met, that the evidence showed that they had knowledge of the material information and folks acted recklessly about not getting it in. so at least there is some consistency. more on the legal standard -- i think we have gone over that period yes, i think i went over that also. there were a variety of actions.
many of these and up in settlements, if not almost all of them. there was an initial settlement that included the city itself. there was a subsequent settlement where actual officials were found liable and had to pay monetary damages. i think $25,000. so that was kind of a first. it was the first time that officials had financial penalties. i think what we start to get out of this that is a little more helpful, i think, in the normal situation, where there is not some obvious bad information that is being committed, is there is a stress in this report
on having adequate disclosure of controls in trading. san diego was found not to have had adequate disclosure procedures at the time they committed these acts, but subsequently adopted procedures -- and mark can touch on that because he helped put in this whole regime. that was the way they started to mitigate -- become good citizens and work their way through the settlement. that has become a theme since it is what we do as disclosure council, and we are part of the disclosure controls and training process. that is sort of where we come in and help you to come up with those procedures, and we have drafted procedures for the city that were recently adopted and helping this board with this
process. quickly, just to close it out, and i will turn it back over to mark, most recent was in new jersey. that was in 2010. interesting in a few ways. again, it was pensions, so similar in that sense to san diego. it involved dozens of bond issues that were found to have an adequate pension disclosure. the things that were a bit different about it -- it is the first eight to be subject to sec enforcement action. it was also found on the basis of negligence, which is a lower standard than recklessness. sell it seemed, by some of us in the area, that it might be a sign of the sec's more aggressive enforcement stance -- taking on a state, taking on
things that were negligent, which is a lower standard. at the same time, they stressed the disclosure training procedures, noted that the state adopted procedures, hired outside disclosure council, took these steps after the fact, unfortunately, but as positive mitigating factors that helped them get a better settlement. so there is a pattern there. i mean, on the one hand, do not permit obvious material things. those are hopefully exceptional cases, but at the same time, to have procedures, to have put in controls that helped create this culture, if you will, of good disclosure. so i think i will wrap it up with that and turned it back over.
>> before we go to the official statement, a couple of comments about san diego. was working for the city of san francisco, and that is where the action was. in our industry, there are events that shaped san diego, and this was one. first, san diego spent approximately $50 million on investigations and lawyers defending city council members. they were barred from entering the securities market. they did a series of private placements that cost them on the borrowing side of things, and, as john indicated, for the first time, staff members -- the sec imposed fines and penalties on staff members, again, ramping up in connection with my earlier
comments, ramping up the pressure. there was a recent "wall street journal" article maybe two weeks ago with the sec indicated that for the first time that it was going to start proceeding negligence claims versus simply -- i think before, they had pretty aggressively gone after intentional or reckless behavior, but now, they have set up for the first time they are going to go after negligent behavior. my take from that is back -- is that the public sector is an easier target than the private sector. we have less resources to bring to bear to defend ourselves, and, quite frankly, it was just not politically tolerable. i say that to say that we need to be politically mindful here, and we are trying to develop a delivered a process to make sure nothing happens. let's go quickly through the official statement. again, the official statement is
a document by which the sfmta will solicit investors to lend money. it will reflect the official statements about the payment date interest rates call provisions, sources of repayment, the financial position of the mta and its operational constraints. it will also identify financial challenges that the mta faces. here is the big take away -- bad information is not bad. i think investors appreciate that all entities, all organizations face financial challenges, labor issues, fuel constraints, whatever. what they want to know is how are you managing? they want statements that prove that you are managing your fiscal challenges. so this is the document, however, that in the chain of documents that you will receive -- you will get an indenture, a purchase contract, resolutions
to review, but the official statement is the document that you should spend quite a bit of time on reviewing. next slide. so the guiding principles -- no misleading statements or omissions. pretty self-explanatory. we get into this debate a lot about whether this is a marketing document or a pre- litigation defense-oriented document. in my view, it can serve both purposes in addition to your financial statements, and i do not know what other reports that the sfmta produces, but this will become a centerpiece to the investment market but also to your constituents about your activities and how well you are managing your challenges. finally, i would like to say in this regard, it is,sfmta -- it
is the sfmta's document. this is your story. in reviewing it, make sure that it tells the tale that you want to reflect. basically, the document should contain actual, verifiable information in a clear and understandable manner. i think that is the key point. observation one -- the sec and investors have exquisite 20/20 hindsight. that means that that fact that you -- well, we do not need to talk about that, that will be the key thing that a claim is made that should have been disclosed. we want to disclose everything without, obviously, burdening somebody in a blizzard of information. then, our decision point on whether to disclose or not to disclose -- well, look at
observation one. remember, the sec can impose civil penalties and make recommendations to the doj. i did not mean to overemphasize that, but i do not mean to minimize it, either. my experience in san diego tells me that decent people that were trying to do the wrong thing had their careers ended by simply a lack of attention. i have been trying to carry that message here, and we will see how it goes. in any event, this is the official statement. material information is what we will include. the investor is the centerpiece of this. we will tell our story. we will tell a story about what we are financing, risk factors associated with that. obviously, you could have a
fall-off in mta revenues, but the big risk factor is seismic -- a calamity event. that is the real big one, at which held that, and our disclosure there runs across -- you know, is consistent across all of our enterprises to the city. so financial information, litigation. so what we would like you to do in reviewing the official statement is to the extent that you have knowledge in your capacity as board members about a particular area, per ruse that area and make sure it comports with your understanding of events. so if it is always in trouble about whether you have to read the whole document, the document will be 100 or so pages, and, no, our guidance is you only have to read the relevant portions of that document, so we can -- we will walk you through
-- when we approved a bond issue, we will walk you through the official statement, pointing out to the areas where we think board members might have a particular expertise. said the basic increase that should be laid out in your staff report and that you should be able to answer for yourself after reviewing the staff report and the official statement is -- what is the purpose of the bond issue? what is the source payment of the bonds? what are the risks that the source of payment may be insufficient? are there any factors that could propose a material risk to the issuer's financial position? those are fundamental questions that every board member should be able to answer, and we want to create a record in the approval process that we have walked through those basic questions. those questions are kind of the floor and would probably regret
any challenge of negligence or recklessness. and then here are other questions that you might ask, and this is just the starting point. there may be others. this is not an attempt to create an exhaustive list, but these are a start point. as well, we will agree to provide continuing disclosure to bondholders. that is, over the life of a bond issue, we will agree to provide financial and operational data on an annual basis. at some level, you can rely on staff in that, but that is a piece of the process here. so here's the question that ultimately comes up -- "can i
just rely and you folks?" that is the staff. in other words, you have not reviewed the documents presented to you. the answer is yes, you can rely on staff, but your alliance has to be reasonable. ok? and so one way of laying a foundation for reasonable reliance is to conduct some level of oversight -- either annually or every other year, to make sure that the disclosure process is the row, is efficient, has maintained some level of internal controls, that your professionals are experienced in expertise and that there is a process that occurs for evaluating the work of professionals. so if you will put in place an oversight function, i think then, at least, you are in a
better position of relying on staff, as i think you are entitled to do. one of the efficiencies here is that the sec has not made clear the extent to which a board member can discharge its responsibility, so they will never say that you have to read the whole document. they will not tell you specifically what you need to do because it is kind of a facts and circumstances test, so we struggle with the precise guidance, but i do think that if you conduct be said oversight, have sonali throughout how rigorous process is -- if you conduct decent oversight, understanding foundational questions, and with respect to red flags, if you get a briefing on a significant issue, it is in the bond approval process.
where did you folks describe that and outlined that? it is a red flag type of issue? the other thing is -- are there things that we may not know about as staff that you know about as board members that you should bring to our attention? that is the other area that you are solely responsible for, those things that you might have gotten a briefing on that, quite frankly, we would not know about. with that, i think i would end the context, primary offerings, secondary market disclosure which your board will probably not touch on -- as a policy matter, you could, but i would not advise it -- and then communications likely to reach investors.
that is statements by you about the m.t.a.'s financial position you need to take some care with. with that, we will close, and should you have any questions, we are available to answer. director nolan: thank you. any questions? are you sufficiently scared? >> i will read through this, and i read through it earlier. a quick question for mr. blake. in orange county as well as san diego, both of those incidents, a lot of that was on the whole derivatives market. you stated earlier, the sec issued a couple of weeks ago some new rules and regulations. is it possible that you could distribute those to the board? i think it is important in light of this because derivatives are still used in the market and underwriters use them that they understand how the market works. >> we can do that. i will tell you now back the
city, with the exception of the airport, is a very conservative bond issuer. i think the issue that will come before you will be a fixed rate issue. no bells, no whistles. there will be no derivative products. we can certainly do that, but again, i think that your board is not authorizing the tea. you need derivative product. i think, without speaking out of turn, there would be a whole level of education that would have to occur before this board and before the board of supervisors before the general fund department would be permitted to issue a derivative product. right now, that is not on the table for any general fund departments, and i think for the sfmta. i can still provide that, but i can also give you the assurance that there is no policy
direction to go in that -- you know, to use those products. >> talking about underwriters, will it be limited to a u.s. broker-dealers? >> yes, we just elected a four- member group from the city's school of underwriters. they are all u.s.-based firms. >> i was just going to add that when we did our due diligence meetings, we talk to the treasurer. so thank you. director nolan: thank you. other members of the board? director reiskin: i just wanted to add that when the voters empower the agency with the authority to issue debt, i think they gave the agency a very important tool to help manage these significant capital needs that we have.
with that important tool, very important responsibilities, and the intent was not to scare everybody about fines and imprisonment but to let folks know that it is a very the "can you trust your staff?" question that was put out there, i just wanted to let you know that as was reference, there are a number of other boards and commissions that have executed this authority. it is not something that is new to the city. ms. bose and i have counterparts in those departments that are well versed in this and are working with some of the same excellent guidance and support from mr. blake's team and
others. while it is an important responsibility, one that we all need to take very seriously, i just want you to know the you have our assurance that what we will be bringing to you will be coming with all of those same kind of resources and expertise. also, as mr. blake indicated in a very conservative manner, the one thing that people are really concerned about is will we be able to pay it back. what we're talking about is that service that would be on the order of 1% of the revenues of the agency, so not only with the instruments be very conservative, the amount of debt that we would be proposing to you -- very small relative to the resources of the agency. i do want to thank ms. bose and
mr. blake for the presentation. we do think it is important that the board's fully understands the responsibilities that we would be undertaking. >> you approved the debt policy at the last meeting which very much constrains what we can and cannot do. i too was very clear on the parameters of debt, said that as further assurance that we will be very financially disciplined as we embark on this. director heinicke: my only question is procedure. i think this is clear, but at the beginning, you said we were on the verge of issuing debt. we are on the verge of considering whether to issue debt. >> that was the direction we believe we received at the last board meeting, but before we can issue debt, you have to approve the document. the board of supervisors has to approve the documents, so that is where we believe we are at this point in the process. director heinicke: ok, so, then
these are important questions to ask, and i will ask a few more. we're talking of that debt issuance for the parking garage. with talk about the other capital project that we talked about before. it is your understanding that we have told you all to issue this debt but simply review the documents going out? is that where we are procedurally? >> i believe we think we have the authority to proceed with issuing $100 million in new money and a refund existing debt, $100 million to be split between transit -- director heinicke: that is sort of the refinancing part of it. >> what i took away from our last presentation was we were given authority to refund the $15 million of existing bonds and issue a new money piece for $100 million -- $50 million for transit and $50 million for parking. director heinicke: maybe that is
the way the resolution read. my understanding is that was the direction we ask you to go in, but i believe there were questions about exactly what we're talking about for policy reasons. i do not think there was any question that the agency would be able to repay this debt. i appreciate the presentation very much. we look forward to getting the statements, but that is not the issue. my question is not about that. i understood the presentation today and am comfortable with staff presentations on our ability to repay, but as i understood the last discussion, there were still some remaining policy questions about some parts of the new debt and particularly how we were going to repay that out of what streams we were going to repay that. i may have just misunderstood. i am sorry i did, but i think directors ramos, brinkman, and i engaged in questions about that,